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Legal Tender - Explained

What is Legal Tender?

Written by Jason Gordon

Updated at April 24th, 2022

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Table of Contents

What is Legal Tender?What Constitutes Legal Tender?Academic Research for Legal Tender

What is Legal Tender?

Legal tender is a type of currency or medium of exchange. It is money that is valid and acceptable for the settlement of debts which must be recognized when issued.

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

What Constitutes Legal Tender?

Both bills and coins are regarded as forms of legal tenders while postage stamps don't qualify to be legal tender. Many countries consider coins and paper currency to be part and parcel of legal tender. Various jurisdictions understand and define legal tender differently. As a result of this, non-cash modes of making payments such as credit cards and cheques are never regarded as legal tender. The denomination and specification of a nations currency by legal standards and regulations ought to be recognized as means of commercial exchange and as sources for settling debts owed. As far as legal tender constitutes all the money denominations under circulation, the sum of coins and the denomination that can be recognized as legal tender differ from one nation to the other. Postal orders and cheques dont constitute legal tenders since they are only recognized at the discretion of the seller, lender or creditor. It is commonly referred to as lawful money. The United States regulations concerning legal tender is very clear despite the fact that most people dont like dwelling on the legal perspectives of the matter at hand.Section 31 of the Coinage Act of 1965 titled legal tender' claims that "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tenders for all debts, public charges, taxes, and dues. The Coinage Act of 1873 was replaced by The Coinage Act of 1965. The federal government introduced new regulations which separated dimes from being part of silver and readjusted the contents of silver to half dollars.Demonetization refers to the act aimed at eliminating the legal tender of a certain currency. This in most cases happens in situations where the country or countries decide to have a different currency from the existing ones. This implies that the currently available currencies are being removed from the system so that they no longer circulate. This is usually done in circumstances where the country intends to do a replacement of old currencies with new ones. This is achieved by bringing up alternative coins and notes. On the other hand, remonetization is the direct opposite of demonetization in which the country recognizes the available currencies as the legal tenders for making payments.

Related Topics

  • Legal Tender
  • Numismatics
  • Gresham's Law
  • Barter
  • Double Coincidence of Wants
  • Parity
  • Medium of Exchange
  • Unit of Account
  • Store of Value
  • Time Value of Money
  • Standard of Deferred Payment
  • Liquidity Preference Theory
  • National Savings and Investment Identity
  • Circular Flow of Money


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